Course Overview

How much of your income do you need to save each year to
smooth out of your standard of living over time?

How can you maximize your standard of living?

What do you need to do to protect your standard of living?

Every financial, human capital, and demographic choice entails benefits and costs,
and your decisions will affect your lifetime standard of living.
The
life-cycle model provides a framework for making financial decisions
along one's life path, and recognizing and valuing the financial aspects of seemingly
non-financial decisions.
The framework is standard microeconomic theory of household behavior, extended to deal
with decision making that occurs over time as well as across times -- good times and
bad times.

EC171 is an introduction to applied economics, which applies the
life-cycle model to personal economic decisions including spending,
saving, and borrowing; matriculation and choosing careers, jobs, and
where to live; marrying, having children, and divorcing; retiring,
retirement accounts, taking Social Security; and investing in stocks and
bonds.

Topics

What is your human capital worth? How can you maximize and protect your
human capital investment?

How much of your income should you consume versus save?

Smoothing your living standard through time and across
good times and bad.

The time value of money and the effects of inflation.

Taxes and the impact of taxes on consumption decisions.

Should you go to college? What should you study? How to pay for college?

Which job to take? Is grad school worth it?

Where should you live? Should you buy or rent your housing?

Should you get married? have kids? get divorced?

Why buy insurance, and how much do you need?

How much should you save for retirement? How should that money be invested?

Software

We will use Microsoft Excel (available at all BU computing labs) in class and for several
homework assignments. It is recommended that you bring your laptop computer with Excel
(or iPad with Numbers) to class. Web-based tools and calculators will be assigned and
discussed in class.

Economic Background

Starting with the path-breaking work of Yale's Irving Fisher,
economists, including
six Nobel Laureates, have spent close to a century
developing the
life-cycle model of saving and consumption. The
life-cycle model provides a real-life framework for making financial
decisions along your life’s path, and recognizing and valuing the
financial aspects of seemingly non-financial decisions. The shorthand
for this framework is life-cycle
consumption smoothing, where
"smoothing" references the need to spread your economic resources over
your lifetime, taking into account that your future is highly uncertain.
The framework is standard microeconomic theory of household behavior,
extended to deal with decision making that occurs over time as well as
across times – good times and bad times.

Every choice you make about education, career, where to live,
housing, and family, and investments entails economic benefits and
costs. The decisions you make will affect your lifetime standard of
living. The emphasis of the course is the development and application of
the life-cycle model as the framework for evaluating all of your
personal finance decisions and getting the best economic deal in life.

To put it politely, most personal financial advice – whether from
trade books, textbooks, television talk show pundits, or professional
personal financial advisors – is not substantiated by the body of
economic science. There are studies in health care indicating that
medical doctors can give bad advice because they believe in the therapy.
Similar to surgeons, financial practitioners can give bad advice because
of ignorance or potential conflicts of interest.

EC171 is an introduction to applied economics, which applies the
life-cycle model to personal economic decisions including spending,
saving, and borrowing; matriculation and choosing careers, jobs, and
where to live; marrying, having children, and divorcing; retiring,
retirement accounts, taking Social Security; and investing in stocks and
bonds.